Short selling data can help active investors manage risk. Generally speaking, short sellers are high-conviction traders. If they’re targeting a stock, there’s usually a good reason they are doing so.
In this report, we are going to discuss the short interest data on Robinhood Markets Inc (HOOD:US). Robinhood is a US FinTech company that operates a trading platform for retail investors. Through this platform, users can invest in stocks, exchange-traded funds (ETFs), options, gold, and crypto-assets. The company is listed on the NASDAQ Global Select Market and currently has a market capitalization of $38 billion.
Robinhood Markets: Short Selling Data
Looking at the short selling data on Robinhood, we see a number of red flags.
Firstly, the stock’s utilization rate is very high at 99.94%. Utilization is the number of loaned shares divided by the available shares in the securities lending market, expressed as a percentage. It is essentially a measure of demand for shares from short sellers. The utilization rate of 99.94% here indicates that demand for HOOD stock from short sellers is extremely high at present.
Secondly, the cost to borrow is also very high at 93.42%. This confirms that demand for the stock from short selling participants is high. The higher the demand from the short sellers, the higher the costs to borrow stock.
Finally, the number of shares on loan is rising. As of 3 August, 17.87 million shares are on loan (representing about 3.9% of the free float). That’s up from 15.24 million shares on loan on 2 August. This tells us that short sellers are ramping up their downside bets here.
Robinhood’s share price spiked in early August after the stock was caught up in the ‘meme stock’ craze. The share price has since pulled back a little, however, it is still well above the stock’s IPO price of $38. Clearly, the short sellers see downside risk from here.
It’s not hard to see why short sellers are targeting the stock. For a start, there’s a considerable amount of regulatory uncertainty here. Robinhood generates the bulk of its revenues by selling client orders to institutions (payment for order flow) and this practice is now coming under scrutiny from regulators. Some market participants believe the US SEC could ban this business model. Recently, SEC Chair Gary Gensler said a full ban of payment for order flow is "on the table.”
Secondly, growth is likely to slow significantly in the near term. Last year, Robinhood experienced phenomenal growth because so many people were stuck at home on lockdown. As people go back to work, trading activity is likely to subside.
Third, the stock’s valuation is quite high. Currently, analysts expect the group to generate revenue of around $2 billion this year. That means the forward-looking price-to-sales ratio is around 19.
Short sellers don’t always get it right, of course. However, given the risks to the investment case here, we think caution is warranted towards the stock right now.